Like a Hot Knife Through Butter, or The Market Catches a Cold

I’ve been saying for a couple of weeks that I thought any bounces would not be sustainable. I was surprised that the last bounce lasted as long as it did. The point is that I was not terribly surprised by today’s hot knife through butter action.

We are about 1.3% beneath where we were on October 10th, when I wrote, “I do not think we will see much more than 2-3% downside from Wednesday’s [October 10] close. If $SPY falls another 2 percent or so, it will be near $140.00 which is an area of dual support from both the lower Bollinger Band (50,2) and the June/July resistance (now support).

A reversal or consolidation near $SPY $140.00 would represent a minor correction of ~5% from the September 14th top, which is surely normal and probably overdue for 2012.

While my call on Monday morning for an immediate bounce was early, that is the unavoidable nature of buying dips. Most of the time you are right, but sometimes you are wrong. With that in mind, I will be adding another post to the series which deals with trying to avoid buying dips which turn into waterfall cascades. The next post will likely (again) demonstrate that waterfall type dips are very difficult, if not impossible to avoid.

In the meantime, there is more evidence that a sustainable bottom is near. Check out the percentage of stocks above their 20 day moving averages (the green line in the lower pane). Click on the chart to enlarge it.

When the green line is near 30 (it closed tonight at 31 and change), the bottoms that result can last for a few weeks or even months. Bottoms that occur near 20 typically occur in a volatile market and therefore may be revisited within a short time frame. Therefore the best case scenario for the next couple of weeks is that volatility remains tame and we fall another couple of percent.

Today’s $SPY gap down on the largest volume since the June bottom is a clear sign that the market environment has changed. We should be looking for increased volatility, larger daily ranges, and snappier reversion to the mean. All that being said, I see nothing abnormal about the market. I’m expecting a minor correction of about 5%. These are similar to getting colds: You get them a few times a year; they may last a couple of weeks and make you feel like crap, but they don’t kill you.

7 Responses to “Like a Hot Knife Through Butter, or The Market Catches a Cold”

  1. So you’re expecting 5% correction from here, means around 1350 ?
    I’m buying the waterfall then. Thanks as always.

  2. Nice post, Woden (sic).

    I should really be reading you more.

    (And don’t take that as an insult, as I am lucky if I get a chance to read my own stuff these days…)

    _______

  3. jackrabbit mcgee

    Hey wood, keep these twitter polls going and diversify the questions. It’s really great seeing the ibankcoin users perceptions on various topics. Nice to have more interactivity amongst users.

Comments are closed.
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6 comments

Like a Hot Knife Through Butter, or The Market Catches a Cold

I’ve been saying for a couple of weeks that I thought any bounces would not be sustainable. I was surprised that the last bounce lasted as long as it did. The point is that I was not terribly surprised by today’s hot knife through butter action.

We are about 1.3% beneath where we were on October 10th, when I wrote, “I do not think we will see much more than 2-3% downside from Wednesday’s [October 10] close. If $SPY falls another 2 percent or so, it will be near $140.00 which is an area of dual support from both the lower Bollinger Band (50,2) and the June/July resistance (now support).

A reversal or consolidation near $SPY $140.00 would represent a minor correction of ~5% from the September 14th top, which is surely normal and probably overdue for 2012.

While my call on Monday morning for an immediate bounce was early, that is the unavoidable nature of buying dips. Most of the time you are right, but sometimes you are wrong. With that in mind, I will be adding another post to the series which deals with trying to avoid buying dips which turn into waterfall cascades. The next post will likely (again) demonstrate that waterfall type dips are very difficult, if not impossible to avoid.

In the meantime, there is more evidence that a sustainable bottom is near. Check out the percentage of stocks above their 20 day moving averages (the green line in the lower pane). Click on the chart to enlarge it.

When the green line is near 30 (it closed tonight at 31 and change), the bottoms that result can last for a few weeks or even months. Bottoms that occur near 20 typically occur in a volatile market and therefore may be revisited within a short time frame. Therefore the best case scenario for the next couple of weeks is that volatility remains tame and we fall another couple of percent.

Today’s $SPY gap down on the largest volume since the June bottom is a clear sign that the market environment has changed. We should be looking for increased volatility, larger daily ranges, and snappier reversion to the mean. All that being said, I see nothing abnormal about the market. I’m expecting a minor correction of about 5%. These are similar to getting colds: You get them a few times a year; they may last a couple of weeks and make you feel like crap, but they don’t kill you.

7 Responses to “Like a Hot Knife Through Butter, or The Market Catches a Cold”

  1. So you’re expecting 5% correction from here, means around 1350 ?
    I’m buying the waterfall then. Thanks as always.

  2. Nice post, Woden (sic).

    I should really be reading you more.

    (And don’t take that as an insult, as I am lucky if I get a chance to read my own stuff these days…)

    _______

  3. jackrabbit mcgee

    Hey wood, keep these twitter polls going and diversify the questions. It’s really great seeing the ibankcoin users perceptions on various topics. Nice to have more interactivity amongst users.

Comments are closed.